Rep. Dave Camp (R-MI) unveiled a plan today (executive summary here) to simplify the tax code and reduce income tax rates, from the current seven rates to just two rates: 10 percent and 25 percent. It also groups personal family exemptions into three categories instead of the usual six: a larger standard deduction, a larger child tax credit, and an additional deduction for single parents. There are an array of other tweaks to existing deductions and credits (such as the EITC), to make them more simple and easy to understand.
Having just browsed the summary and all 182 pages of the discussion draft, my first reaction is Hooray! Any effort to reduce the compliance costs and time involved in filing taxes is commendable. Indeed many individuals who qualify for certain credits or deductions because they are simply unaware that they qualify for them. While paying accountants to prepare tax forms keeps them employed, it takes money out of other people’s pockets. So attempting to make the process more “postcard friendly” is a step in the right direction.
There are some other goodies as well. The Camp plan would restore the R&D tax credit, making it permanent, lower the corporate income tax rate for 25 percent, and permanently repeal the troublesome Alternative Minimum Tax that surprisingly hits middle-income families. (I might add, however, that the NCPA’s 9 percent corporate tax plan is worth looking into).
Also, the current capital gains tax structure would be repealed. The bill states,
“The modified tax preference for long-term capital gains and dividends would result in such income being taxed at 60 percent of the taxpayer’s marginal rate. Thus, for example, taxpayers in the 35-percent bracket would pay an effective rate of 21 percent on adjusted net capital gain. Combining this with the additional 3.8 percent tax imposed on such income by Code section 1411 yields a top effective rate of 24.8 percent, slightly lower than the top effective rate under current law, which is 25 percent.”
At least the bill tempers the obsession with taxing investments.
The caveat: I raise my eyebrows at the 10 percent “surtax” in this plan on certain types of unearned income for singles earning $400,000 a year (couples earning $450,000 a year). Press reports mentioned the surtax, but the word is nowhere to be found in the draft. But hey, let’s call it what it is. It would essentially replace the current 39.6 percent tax bracket by adding 10 percentage points to the 25 percent that households pay. If I recall, many on the right, including members of Congress, decried the Obamacare 3.8 percent “surtax” that is the law of the land now for unearned income over $200,000 a year. The estimate that it the Obamacare tax would produce $317 billion in additional revenue over 10 years is probably unrealistic, particularly since a cursory search on the Internet produces a slew of articles on how to avoid the tax. So why is a surtax coming from the other side any different?
If this plan picks up steam, expect a few more blog posts on its many aspects.